On July 2, 2013, the U.S. Court of Appeals to the Federal Circuit addressed whether a post-issuance determination of patent invalidity by the USPTO can nullify an earlier damages award in district court in Fresenius USA, Inc. v. Baxter International, Inc. (Fresenius II), No. 12-1334 (Fed. Cir. July 2, 2013). The decision is the most recent chapter in the ongoing patent litigation between Fresenius and Baxter over U.S. Patent No. 5,247,434 (“the ’434 patent”). In a divided panel decision authored by Judge Dyk, the court answered affirmatively, highlighting the timing of third-party challenges before the USPTO and counterpart stays of litigation in district court. Specifically, where execution of a damages award has not yet occurred and the decision is still pending in some form (in this case, on appeal only with respect to damages), the Federal Circuit’s holding tells district courts to “give effect” to the USPTO’s invalidity determination.
The Saga of Fresenius and Baxter
Fresenius and Baxter are makers of hemodialysis equipment—the ’434 patent owned by Baxter covers hemodialysis machines with touchscreen interfaces. In 2003, Fresenius filed a declaratory judgment action in the United States District Court for the District of Northern California against Baxter for invalidity and non-infringement of, inter alia, the ’434 patent. Baxter counterclaimed for infringement. Fresenius stipulated to infringement but argued that the ’434 patent was invalid. In February 2007, the district court entered judgment as a matter of law in favor of Baxter, holding that Fresenius had failed to carry its burden of proof on the issue of invalidity. The Federal Circuit upheld this decision on appeal in September 2009, Fresenius USA, Inc. v. Baxter International, Inc. (Fresenius I), 582 F.3d 1288 (Fed. Cir. 2009), but remanded for a re-determination of post-verdict damages.
Remand and Appeal on Damages
Following further arguments on remand, the district court entered a damages award of approximately $24 million on March 16, 2012. Execution of the award was stayed pending appeal in Fresenius II.
Ex Parte Reexamination
Concurrent with its litigation in district court, Fresenius petitioned for an ex parte reexamination of the ’434 patent in the USPTO, which was instituted in 2006. On March 18, 2010, the Board of Patent Appeals and Interferences affirmed the Examiner’s rejection of the challenged claims for obviousness. That decision—one contrary to the district court’s February 2007 holding affirmed by the Federal Circuit in September 2009—was itself affirmed by Federal Circuit on May 17, 2012. In re Baxter Int’l, Inc., 678 F.3d 1357 (Fed. Cir. 2012). The court’s mandate issued on November 2, 2012, and the USPTO issued a reexamination certificate canceling the ’434 patent claims at issue on April 30, 2013.
Thus, in the lead up to Fresenius II:
- District court enters final judgment that Baxter’s claims are not invalid; Federal Circuit affirms (Fresenius I);
- USPTO finds the patent claims invalid;
- District court issues final damages award but stays execution pending appeal;
- Federal Circuit affirms USPTO invalidity determination; USPTO cancels claims.
“Final” Perhaps, But Not Final Enough?
On appeal from the district court’s final damages award, Fresenius argued that the USPTO’s cancellation of the ’434 patent claims divested Baxter of a cause of action for infringement. Judge Dyk, joined by Judge Prost, agreed, noting that, under either the reissue or reexamination statutes, if a claim is cancelled or amended to cure invalidity “the patentee’s cause of action is extinguished and the suit fails.” Slip op. at 17. Although neither party contested this point, Baxter argued that the district court’s entry of final judgment operated as res judicata regarding the damages award, with the consequence that Fresenius was precluded from challenging the district court’s underlying holding of validity (upheld in Fresenius I). Slip op. at 18.
With respect to Baxter’s res judicata argument, Judge Dyk noted that it was important to “distinguish between different concepts of finality,” because definitions of finality cannot automatically be carried over from appeals cases to preclusion problems. Framing the issue as whether the judgment in this case is “sufficiently final so that it is immune to the effect of the final judgment in the PTO proceedings, as affirmed by this court in In re Baxter,” Judge Dyke stated that, “while the district court in 2007 entered a judgment final for the purposes of appeal, [which] might have been given preclusive effect in another infringement case between these parties, it was not sufficiently final to preclude application of the intervening final judgment in In re Baxter.” Slip op. at 19.
Judge Dyk further determined that the Court’s remand decision in Fresenius I on the damages issue was also “not sufficiently final” so as to preclude application of the intervening invalidity determination. In this analysis, Judge Dyk applied a strict standard of finality—defining a final judgment as one that “leaves nothing for the court to do but execute the judgment.” Slip op. at 20 (quoting Mendenhall v. Barber-Greene Co., 26 F.3d 1573 (1994)). Here, the Federal Circuit’s decision in Fresenius I lacked sufficient finality because the case had been remanded to examine questions of proper royalty rates: “[I]t is well-established that where the scope of relief remains to be determined, there is no final judgment binding on the parties (or the court).” Slip op. at 20. Accordingly, under the U.S. Supreme Court’s ruling in Simmons Co. v. Grier Bros. Co., 258 U.S. 82 (1922), the court gave effect to the “intervening legal development” arising from the USPTO’s invalidity determination. Slip op. at 21–23.
Judicial Finality Under Plaut
Baxter also argued that giving the USPTO the power to nullify a district court’s final damages award violated separation of powers under Plaut v. Spendthrift Farm, Inc., 514 U.S. 211 (1995). Under Plaut, a final judgment rendered by an Article III court is not retroactively overturned by a subsequent executive or legislative act.
Agreeing that Plaut made clear that coordinate branches are not retroactively compelled to reopen a case, Judge Dyk pointed to language in Plaut requiring courts to apply the law in effect at the time it renders its decision: “[A]n appellate court must apply that law in reviewing judgments still on appeal that were rendered before the law was enacted, and must alter the outcome accordingly.” Slip op. at 27 (quoting Plaut). As Baxter’s claims were cancelled while the infringement suit was still pending on appeal, Judge Dyk dismissed Baxter’s Plaut argument as “inapplicable.”
Judge Newman’s Dissent
In a dissenting opinion, Judge Newman—who also dissented in In re Baxter—vehemently disagreed with the majority on several grounds. First, based on Plaut, “the constitutional framework requires that when there has been a prior judicial determination of the issue of patent validity, the conclusiveness of the judicial rulings resolves the determination.” Slip op. at 4 (Newman, J., dissenting). Second, the judgment in Fresenius I was a final judgment on the validity of the ’434 patent. Id. at 12. Thus, that judgment was binding on the USPTO, which “can neither invalidate, nor revive, a patent whose validity the court has adjudicated.” Id. at 4, 25. Judge Newman also reiterated her criticism that the Court’s decision would create an “option effect” by allowing infringers to seek “consecutive reexaminations until the patent falls.” Id. at 13.
Finality . . . ?
Judge Newman’s dissent not only reflects a long-standing split within the Federal Circuit, but highlights constitutional issues regarding the separation of powers. See also In re Translogic Tech., Inc., 504 F.3d 1249 (Fed. Cir. 2010); In re Swanson , 540 F.3d 1368 (Fed. Cir. 2008). Should Baxter file a petition for certiorari , the Supreme Court may well find Fresenius II ripe for review. Thus, the issues in Fresenius II remain very much alive and evolving.
Potential Consequences for Patent Litigants?
Fresenius II suggests several tactical lessons for patent litigants in general.
- Stays in District Court. Fresenius II acknowledges that its decision likely does not affect execution of a damages award because “title to those moneys does not depend on the patent, but upon . . . the judgment of the court.” Thus, an accused infringer who is unsuccessful in obtaining a stay of district court proceedings (as Fresenius was) can nonetheless continue to argue for a stay of execution pending the outcome of reexamination, while the patent holder might object on the particular facts.
- Bifurcated Trials. A bifurcated trial if justified under all the circumstances may delay an award of damages, offer the chance of a second appeal, and provide time with which to seek a post-issuance review of validity in the USPTO.
- Timing. At the time the district court entered the final damages award for Baxter, the USPTO’s invalidity determination had not been affirmed by the Federal Circuit, and the Office had not yet cancelled the ’434 patent claims. Thus, where a judgment is not “final” under the strict Mendenhall standard, a post-issuance determination of validity by the USPTO may be useful in arguing to vacate a damages award on appeal.
- Post-Issuance Review Mechanisms. Parties seeking to challenge the validity of a patent have several post-issuance review mechanisms to choose from: ex parte reexamination, inter partes review, post-grant review, and the transitional program for covered business method patents. These proceedings have differences such as when they are available, to whom they are available, estoppel, stays of district court litigation, speed, and availability of extensions of time. These last three considerations have importance—had Baxter been able to delay the USPTO’s invalidity determination until after Fresenius II, the damages award might have been retained.